Demutualization
The SECP is vigorously pursuing the process of demutualization and integration of stock exchanges. For this purpose, SECP has prepared a preliminary road map for demutualization and integration, which has been shared with the stock exchange. Moreover, SECP has engaged the services of legal expert to draft special legislation (Act and accompanying Rules and Regulations) to enable demutualization and integration of exchanges. Extensive discussion on the enabling legislation is in process and is expected to be finalized shortly.

SECP is keeping a close liaison with stock exchanges to drive the process of demutualization and possible integration. In this regard, soon after the submission of report by expert committee on demutualization and integration, comprising of international and national experts, SECP initiated a consultative process with all the stakeholders. In this regard, it arranged various meeting with all the three stock exchanges to discuss the modalities and implementation of demutualization and possible integration. The SECP and stock exchanges also signed a joint action plan on December 11, 2004.

Pursuant to the said plan, Karachi Stock Exchange (KSE)submitted a preliminary report on demutualization along with the valuation of the exchange. KSE has also submitted its business plan. Meanwhile, KSE and SECP have agreed on issues relating to special legislation for demutualization, segregation of regulatory functions from its commercial functions, conflict of interest committee. Issues of compensation to the members and restriction on trading rights are still to be resolved.

The Lahore Stock Exchange (LSE) and Islamabad Stock Exchange (ISE) have agreed in principle to support setting up a unified stock exchange through the merger/integration of LSE and ISE. In this connection, both the exchanges are in process of preparing the business plan. The joint consultants of LSE and ISE have presented preliminary business plan and scheme of arrangement.


Working Group on Debt Market and Commercial Paper
In order to identify impediments to the development of the debt market and Commercial Paper (CP), the State Bank of Pakistan and SECP in their 13th Co-Ordination Committee Meeting held on March 09, 2005, formed a working group on “Debt Market and Commercial Paper” comprising of the representatives from SBP, SECP, TFCs and CPs issuers, consultants to TFCs and CPs issues and commercial banks acting as Primary Dealers of Government bonds. The working group is actively looking into the issues surrounding debt market to suggest viable recommendations.

Derivatives
The SECP has formed a Committee to conduct feasibility of the introduction of exchange-traded derivatives market in Pakistan. Derivatives markets are developing in many of the emerging capital markets including India. In order to ascertain the scope and feasibility of such markets in Pakistan, the Committee is expected to conduct thorough research and analyze the introduction of exchange-traded derivative products. The Committee is expected to submit a report shortly.

Regulatory Framework for Real Estate Investment Trusts
The SECP has prepared draft Real Estate Investment Trusts (REITs) Rules. These draft Rules, along with a Consultative Paper, have been made public for soliciting comments and suggestions from stakeholders and experts. Once received, the comments shall be considered for incorporation in the draft before approaching the Ministry of Finance and Ministry of Law for vetting and notification.

In recognition of international and regional financial market developments and in order to modernize Pakistan’s financial sector, the SECP has been working on the potential of introducing REITs in Pakistan as a new investment and saving vehicle. The formulation of the draft REITs regulatory framework is a significant milestone in this regard. The REITs Rules lay down the requirements for establishment of REITs in Pakistan and are based on the study of international jurisdictions by a Task Force constituted by the SECP for the purpose. The Task Force has highlighted certain impediments in the real estate sector that are expected to hinder the growth of REITs in Pakistan. The Task Force also gave its recommendations to the Federal and Provincial Governments on fiscal incentives and removing the various impediments, to ensure an orderly and transparent introduction of REITs in Pakistan’s financial market.

Private Equity Funds
The SECP is in the process of establishing guidelines for private equity business in Pakistan as well as guidelines for valuation of private equity funds and governance principles for Private Equity Management Company.

Private equity can be looked as a pre-emptive tool before further liberalization of Pakistani economy, which will give local investors a chance to hold local assets. It may help Pakistani firms to become global, especially in this new wave of globalization. By pooling their money together, a lot of small Pakistani investors will be able to contribute to the development of industry and infrastructure in Pakistan.

Actuarial Valuation Regulation
The policyholders’ liabilities of life insurance business are estimated through Actuarial Valuation, basis of which are yet to be prescribed by the SECP. The SECP, in consultation with the Pakistan Society of Actuaries and Life Insurers, is actively working on Actuarial Valuation Regulations. The draft of Actuarial Valuation Regulations has been prepared, which is expected to be finalized and notified in the first half of the year 2006.

National Mortality Table
A mortality table is used by life insurers to estimate their liabilities and work out the premium rates. Unfortunately most of the life insurers are using an outdated mortality table which was developed in 1960s. In collaboration with the Pakistan Society of Actuaries and with the help of life insurers, the SECP is working towards the development of a National Mortality Table.

Specialized Companies Returns Submission & Compliance System
The SECP has developed an information system – the Specialized Companies Returns Submission and Compliance System (SCRCS) – for making the off-site surveillance mechanism more effective. It is expected that this system will be operational within the first quarter of year 2006. The SCRCS will not only rationalize the number of returns submitted by non-banking finance companies but will also enhance the efficacy and utility of the submitted information.

Consolidation of Financial Sector
The SECP has been encouraging mergers and consolidation in the financial sector. The consolidation has resulted in improving the resource mobilization potential and the operational efficiency of NBFCs including modarabas due to strengthening of capital base and economies of scale, respectively.

Development of Mutual Funds Industry
In order to promote investment through mutual funds, the SECP has allowed provident funds to invest up to 50 percent of their funds in unit trust schemes authorized by the SECP and, further, to expose up to 20 percent of their funds to a single scheme. Moreover, the SECP has given permission to form index funds, sector funds and fund of funds as well as conversion of a closed-end fund to an open-end fund in order to provide product diversification.

It has been made obligatory for asset management companies to get the unit trust schemes that they manage, rated by a rating agency registered with the SECP. Management companies are also required to widely disseminate ratings of their funds so that institutional as well as individual investors may make informed decisions.

Supervision of Privatized Mutual Funds
Upon privatization of ICP mutual funds, three lots of funds were formed: ICP Mutual Funds Lot ‘A’ comprising of 13 funds; ICP Mutual Funds Lot ‘B’ comprising of 12 funds; and Lot ‘C’ comprising of SEMF. These funds were privatized without being converted into a corporate or trust structure. New fund managers were given a time limit of six months by the Privatization Commission and ICP (under the Management Rights Transfer Agreement) to restructure the privatized funds and bring them in a form acceptable under the prevalent Rules. The SECP took necessary actions, including amendments in Rules as well as transforming and aligning the structure of the privatized funds according to the existing legal provisions for facilitating their privatization. Among other conditions, the SECP required that assets of these funds should be placed in custody of separate entities, which were eligible to act as the custodian and trustee of these funds. Subsequently, the new fund managers were also allowed to merge certain funds and transform them into a trust.

Islamic Debt Instruments
With a view to assisting the modaraba sector in resource mobilization, they were allowed to issue Musharaka based Term Finance Certificates on the basis of profit and loss sharing principles. It is expected that this will open a useful avenue of resource mobilization for the Modaraba sector and will also add to the growth of the corporate debt market under Islamic financial principles.

Anti-Money Laundering
As part of its drive to combat money laundering practices in the financial sector, the SECP directed the NBFCs and modarabas to accept deposits from investors only after ensuring that an account had been opened in the investor’s name using a standardized account opening form. Moreover, these entities were directed to use cross cheques from 1 July 2003 onwards for payments and receipts exceeding Rs. 50,000. The anti-money laundering requirements have also been incorporated in the Prudential Regulations issued by the SECP for NBFCs and modarabas.

Advisory Committee on Pensions
In terms of the Voluntary Pension System Rules, 2005, the SECP has formed an Advisory Committee, consisting of eight members. The membership is drawn from the Ministry of Finance, Mutual Funds Association of Pakistan, Pakistan Society of Actuaries, Employees Old Age Benefit Institution, Trustees and life insurance industry. The Advisory Committee provides a mechanism for market participation. Three meetings of the Advisory Committee have taken place till December 2005, wherein various implementation guidelines and other operational issues were discussed. In order to solicit greater market participation, various professionals, in addition to the designated members of the Advisory Committee, were invited to its meetings.

Corporate Tax Policy
The SECP, jointly with the Central Board of Revenue (CBR), set up a Task Force in December 2004 for formulating a corporate tax policy aimed at encouraging corporatization and progressive development of the corporate sector. Mr. Justice (R) Saleem Akhtar, former Tax Ombudsman, was appointed as the chairman of the Task Force. In addition, the Task Force comprised of Mr. M.S. Lal, Member CBR, Mr. Abdul Rehman Qureshi, Adviser to the SECP; Mr. Ahmad Khan, former Member, CBR/Monopoly Control Authority; Mr. Mukhtar Ahmad Gondal, Member Income Tax Tribunal; Mr. Abdul Hameed Chaudrhi, chartered accountant; and Syed Mohammad Shabbar Zaidi, chartered accountant. Syed Fayyaz Mahmud, Director, Policy Department acted as the secretary to the Task Force.

The Task Force submitted its report to the SECP and CBR in April 2005. The report put forth various recommendations for easing structural and administrative problems of corporate entities, thereby promoting their development and encouraging corporatization. On the basis of the report, the SECP engaged in dialogue with the concerned quarters; several recommendations of the Task force were, as a result, incorporated in the Income Tax law through the Finance Act, 2005.

This initiative of the SECP proved to be instrumental in promoting corporatization of businesses and addressing practical difficulties faced by them as corporate entities, as evident from the rising trend of incorporation.

Proposals for Finance Act, 2005
The SECP furnished proposals to the Government for its consideration in the Finance Bill 2005 in order to remove irritants to smooth functioning of companies and financial institutions as well as to encourage their progressive development. These proposals were based on the suggestions received from different quarters and, largely, on the recommendations of the Task Force on Corporate Tax Policy, jointly formed by the SECP and CBR.

Most of the recommendations of the SECP were accepted by the Government and included in the Finance Act, 2005. These included the following:

(i) The definition of “small company” has been added in the Income Tax law.

(ii) Corporate tax rate for small companies has been slashed by 50 percent; these companies would now be taxed only at 20 percent. This is expected to encourage corporatization by encouraging businesses to enter into the corporate net.

(iii) Withholding tax of 3.5 percent on supplies has been a major irritant for companies, particularly in comparison to non-corporate entities in the same business. The withholding tax requirement on supplies, services and contracts for small companies has been abolished.

(iv) Non-listed companies, which get listed on a stock exchange would receive a tax rebate of 1 percent. It is hoped that this would serve as an incentive to larger companies to solicit public participation in their securities.

(v) Losses on amalgamation, which were hitherto allowed to be adjusted on amalgamation of companies in the financial sector, can also be adjusted by industrial undertakings. This is expected to encourage revival of sick units.

(vi) Group relief has been available to companies in the industrial sector only. This concession would now be available to companies in services sector as well.

(vii) Capital gains on dealings in listed securities were taxable in the hands of insurance companies although other investors were tax exempt in this regard. The disadvantage for insurance companies has now been removed.

(viii) In case of investment in TFCs, up to the value of Rs. 150,000, there would be no withholding tax on the return on these TFCs. This exemption would encourage investment in TFCs and also remove the disadvantage vis-à-vis National Savings Schemes.

(ix) Limit of investment in IPO by salaried persons has been increased from Rs. 100,000 to Rs. 150,000 to allow enhanced participation in new offers of securities.

(x) The prescribed ceiling for admissibility of depreciation on value of leased cars has been removed, which will help promote the leasing sector.

(xi) Pension funds registered with the SECP have been allowed certain tax benefits, including tax credit on employees’ contributions of up to Rs. 500,000 in a tax year, tax exemption on the income of a pension fund and tax exemption on profit of a pension fund manager on redemption of seed capital. These incentives would provide the much needed boost to the development of private pensions in the country.

(xii) Capital gains of stock exchange brokerage firms shall not be taxed if they convert into corporate brokerage houses up to 30 June 2006. It is hoped that brokers will take advantage of this facility.

Report on Observance of Standards and Codes – Accounting and Auditing
The World Bank and the International Monetary Fund (IMF) have undertaken an analytical study of the accounting, auditing and financial reporting regime for corporate entities in Pakistan, at the request of the Government. The SECP is a major stakeholder in this regard, having the regulatory authority to enforce accounting standards and reporting requirements and possessing oversight of the activities of ICAP.

The Professional Services and Policy Division (PSPD) provided necessary support and assistance to the World Bank-IMF mission in carrying out the study. It also contributed various suggestions and comments on the draft report and actively contributed to the finalization of the Report on Standards and Codes - Accounting and Auditing (ROSC-AA).

The final ROSC-AA will assist PSPD in undertaking necessary reform measures for addressing institutional, regulatory and legal weaknesses in the accounting and auditing framework.